Shippers, your exposure to higher freight costs can be greatly reduced! Recent diesel market activity shows lower price points being replaced by higher prices. Major events, such as IMO 2020, requiring all ocean-going ships to use low-sulfur fuel as early as 2020, are causing projections of a diesel shortage that will ripple through the highway and river fuel markets as well. As you know, price volatility presents great exposure to shippers.
There is an answer to this rising risk. It is the Volatility Limiting Strategy (VLS).
The strategy begins by reviewing the shipper’s known or expected freight use. This may be described as truck miles per time period, tons shipped per period, containers shipped per period, or cubic meters shipped per period. These inputs are converted by algorithm into equivalent gallons of diesel. Then, an option structure is formed around the equivalent gallons of diesel.
The structure is designed to return a profit equal to the increased cost of the fuel surcharge paid by the shipper. In plain terms, if the rising cost of fuel costs you an extra $250,000, the Volatility Limiting Strategy (VLS) should yield close to $250,000 in profits to offset the cost.
VLS can be thought of like an insurance program. There is an upfront cost, but nothing beyond that. Thus, you offset risk, but maintain the potential benefit of fuel prices and surcharges declining.
What are your plans if diesel prices rise by 50% or more? Many shippers have little control over the method and quantity of their shipments. They must ship to stay in business! Why not control this risk? VLS is an optimal solution.
The process to implement VLS is simple and quick. We at Castlebridge Partners manage all the details. The implementation can be a short as two weeks.